FX TCA and Benchmarking

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1 FX TCA and Benchmarking July 7 th 2014 THIS IS SALES AND TRADING COMMENTARY PREPARED FOR INSTITUTIONAL INVESTORS; it is NOT a research report; tax, legal, financial, or accounting advice; or an official confirm. The views of the author may differ from others at MS (including MS Research). MS may engage in conflicting activities -- including principal trading before or after sending these views -- market making, lending, and the provision of investment banking or other services related to instruments/issuers mentioned. No investment decision should be made in reliance on this material, which is condensed and incomplete; does not include all risk factors or other matters that may be material; does not take into account your investment objectives, financial conditions, or needs; and IS NOT A PERSONAL RECOMMENDATION OR INVESTMENT ADVICE or a basis to consider MS to be a fiduciary or municipal or other type of advisor. It constitutes an invitation to consider entering into derivatives transactions under CFTC Rules 1.71 and (where applicable) but is not a binding offer to buy or sell any financial instrument or enter into any transaction. It is based upon sources believed to be reliable (but no representation of accuracy or completeness is made) and is likely to change without notice. Any price levels are indicative only and not intended for use by third parties. Subject to additional terms. at

2 Agenda TCA overview Role TCA plays in the execution lifecycle Benchmark overview Benchmark developments 2

3 FX TCA Overview Why is use increasing in FX? Investor pressure responding to market developments e.g. WMR Aggregation of central dealing desks, often managed by Heads of Trading with equity backgrounds Pressure on returns Response to potential regulatory developments What is available in the market? 3 rd party independent providers, e.g. ITG, FX Transparency, New Change FX Platform providers, e.g. Bloomberg, Trading Screen Bank services N.B. main focus is on post-trade TCA, limited availability of pre-trade analytics 3

4 Role of TCA in Execution Lifecycle Individual Transaction Pre-Trade Feedback to improved pre-trade analysis, changing execution approach and more informed decision making Execution Real-time monitoring Multiple Transactions Historical Analysis Post-Trade Strategic Individual Transaction Immediate Post-Trade Tactical Source: Morgan Stanley QSI 4

5 Benchmark Overview 1. Theoretical Fair value risk transfer 2. Observed Interval based, e.g. TWAP VWAP Point in time, e.g WMR Arrival Price Issues: Data source Underlying trade objective Representative Independence Revaluation point vs execution benchmark 3. Experience based Peer group analysis Source: Morgan Stanley QSI 5

6 Benchmark Developments Key to align benchmark with trading objective No one size fits all solution, multiple benchmarks required Clients broadly segmented as follows: 1) WMR with limited or no discretion (i.e. passive managers who are tracking indices such as MSCI which use WMR) 2) Asset managers trading FX as a utility to buy/sell international securities, increasingly moving towards benchmarks such as TWAP/VWAP where the interval approximately matches the trading period of the underlying security 3) Asset managers trading FX as an asset class, increasingly using Arrival Price as key benchmark 6

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